Counting the hidden ($120 billion) cost of US energy economy

The National Academies of Science, in response to a request from Congress, has …

One of the biggest challenges of evaluating and planning the energy economy is the existence of what economists call externalities, or externalized costs. Any activity that causes damage to the environment and its inhabitants, such as running a large coal plant, exacts a price from society as a whole that doesn't get charged to either the utilities or their customers, but can show up in other costs, such as healthcare bills. In order to get a better sense of of the externalities associated with the US energy economy, Congress asked the National Academies of Science to estimate their dollar value for electricity, transport, and heating. The NAS has delivered a number for 2005: $120 billion, without including the impact of climate change.

To provide a more concrete example of an externality, many fossil-fuel powered vehicles and generating stations produce particulate matter. Since it costs money to install and run equipment that removes these particulates from the exhaust stream, utilities and automobile manufacturers tend to avoid doing so. But particulates have a significant impact on human health, especially among those who are prone to respiratory difficulty, like asthmatics. So, part of the cost of particulate emissions is externalized to the health care economy, with other parts going to the individual sufferers, their employers (due to missed work), etc.

Nuclear comes out quite well, in part because the most environmentally damaging aspect of nuclear power is uranium mining, and we do relatively little of it in the US

Although the existence of externalities is widely recognized, calculating their exact cost is challenging, to put it mildly. Even for something that's straightforward to estimate, like the health care costs associated with respiratory distress, figuring out the fraction of those caused by particulates (or other forms of pollution) isn't necessarily simple. But, for the full cost of something like wind power, the NAS panel was considering things like whether there's a way to put a price on the bats and raptors killed by turbines.

As a result, the report consistently mentions that its figures should be viewed with caution. The authors also decline to attach a price to a number of externalities, like the national security cost of ensuring our oil supply or the loss of ecosystem services; they also consider the costs of climate change separately from other externalities. Still, the authors emphasize that this should be taken as an indication that the $120 billion figure is a low estimate.

Producing electricity and heat

Another consequence of this caution is that the final figures are dominated by pollutants that are well understood—sulfur dioxide, nitrogen oxides, ozone, and particulate matter—and their (relatively) easy-to-quantify impacts on human health. So, it's to be expected that the dirtiest fuel, coal, would dominate the proceedings, accounting for just over half of the 120 billion dollar figure.

Still, the committees that prepared the report found a number of differences within the data. Due to tightened environmental standards, the oldest plants were far and away the most damaging, with the dirtiest 10 percent of the coal-fired plants accounting for over 40 percent of the damages ascribed to coal. Overall, coal clocked in with about 3.2� for each kilowatt-hour generated. Natural gas is much cleaner, and it blew that figure away, with only 0.16� of externalized costs per kilowatt-hour. But here, the differences between the modern and dirtiest plants was even more dramatic, with the bottom 10 percent of plants accounting for 65 percent of the total damages from natural gas.

Nuclear comes out quite well, in part because the most environmentally damaging aspect of nuclear power is uranium mining, and we do relatively little of it in the US. The report notes, however, that there are significant uncertainties about the costs of waste storage, and the possibility of things like groundwater contamination, which could exact a staggering cost. Renewable power sources like wind and solar have externalized costs associated with equipment production, but these were considered small enough to be essentially negligible.

Most of the heating in the US is provided by natural gas, and the costs there are also low. However, a significant fraction comes from electricity, which helped drive the total cost for heating up to $1.4 billion.

Transportation

Energy-wise, the remaining segment is transportation, which comes in at $56 billion in health and other nonclimate damages. Despite the wide variety of technologies considered by the report's authors, including biofuels, compressed natural gas vehicles, and various forms of electric and hybrid cars, the cost per mile travelled is very similar. Part of that is the fact that the energy cost of producing a vehicle is high, and plays a significant role in the lifecycle analysis.

But a significant part of the cost comes from the fact that we have yet to identify a very good oil substitute. Electric vehicles were dragged down by the large fraction of power generated by burning coal, while biofuels were hurt by our current reliance on corn ethanol, which requires a significant energy input. Non-corn-based fuels, which aren't currently on the market, have the potential to do significantly better. Compressed natural gas, again due to the fact that it burns cleanly, also comes out well. Electric and hybrid vehicles do not, primarily because their manufacturing costs are currently higher than those of regular vehicles.

At the moment, diesel is actually quite bad, but the authors point out that the US is in the process of phasing in new standards for these vehicles. As a result, by 2030, diesel is expected to have some of the lowest externalized costs of any transportation technology.

The climate

The authors tackled climate separately from the rest of the analysis simply because the estimates of its impact vary widely. They tested a whole series of economic models that and fed them different assumptions for the cost of climate impacts, and found that they could differ by as much as an order of magnitude even when given a similar set of assumptions. They also point out that these economic models don't do well at taking into account low-probability, high-consequence events, like a sudden rise in sea level, and the discount rate involved in translating future costs into current dollars can be a source of error.

All that aside, they do provide some guidance for both current policy makers and future analyses. For one, they point out that the costs of CO2 emissions will continue to rise over time, as it has a long enough life span in the atmosphere to make the impacts cumulative. They also suggest that providing an accurate measure of the costs based on ton of carbon dioxide equivalent emissions would be helpful, as it's possible to derive estimates based on that number. In general, they found that a value of $30/ton (somewhere in the middle of the range of available estimates) would give externalized costs that are roughly equal to the health costs.

Again, coal comes out very badly, given that burning it produces the most CO2 per energy produced, while natural gas does very well. But there is one downside to this otherwise clean power source: methane is a more potent greenhouse gas than carbon dioxide, so leaks that release it into the atmosphere are thought to account for about three percent of the US' greenhouse gas contribution.

Given the challenges of this sort of analysis, it's not clear that we're at the point where we can have fine-grained estimates of how specific policy decisions will alter the externalized costs of the energy industry. What the figures do suggest, however, is the tremendous room for improvement that can be had by targeting the small population of extremely dirty sources, like the most pollution-prone coal and gas generating plants.